World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Tuesday, August 11, 2009

While the Congressional Oversight Panel is seeing problems (finally) with small banks, they are still ignoring the gigantic problems at the large banks. All these balance sheet problems are going to fester until BOTH the DEBT and DERIVATIVES are cleared out of balance sheets. BOTH the BIG and SMALL banks that are infested will not survive such a cleaning. THAT’s the problem, only no one wants to acknowledge, much less handle, the truth.

The ostrich with his head buried in the sand will not be able to stop a freight train barreling down upon him (ht David)…

WASHINGTON (MarketWatch) -- The largest U.S. financial institutions are better able to handle a worst-case scenario for potential losses in their whole-loan portfolios than smaller public banks, which could face serious trouble, according to a report released by a bank-bailout oversight panel Tuesday.

According to a report from the Congressional Oversight Panel, which is charged with overseeing the $700 billion Troubled Asset Relief Program, or TARP, the 18 largest financial institutions with over $600 million in assets would "be able to deal with" whole-loan portfolio losses projected in an analysis the group completed.

However, the report's analysis of troubled whole loans -- based on a model developed by SNL Financial -- suggests they pose a threat to smaller public banks, those with $600 million to $100 billion in assets. The report also takes issue with the Treasury department's decision to delay indefinitely a program to buy toxic whole loans from banks.

Whole loans refer to individual residential or commercial mortgages, as opposed to packaged mortgage securities, which have received much of the attention during the financial crisis.

"We are trying to highlight the issue of smaller banks because we believe it has been ignored and until toxic whole loans are taken off their books, we won't see them lending again in the way we need them to," said COP chairwoman Elizabeth Warren. "The reason it is so important to think about smaller financial institutions is because they do disproportionately more of the lending to small businesses."

According to the report, smaller banks in the $600 million to $100 billion group will need to raise significantly more capital based on pessimistic assumptions the COP considered, as the estimated losses will outstrip the projected revenue and reserves.

"The capital shortfall for those relatively smaller banks is primarily due to the lack of reserves, which on average account for only 25% of the expected loan losses."

The report said that, based on a less pessimistic scenario, smaller public banks would need to raise between $12 billion to $14 billion in capital to offset their losses. However, it added that based on a more stressful scenario, these institutions would need to raise $21 billion in capital to offset their losses.

The model employed assumptions that were 20% more negative than stress-test assumptions employed by the Federal Reserve Board in an analysis it made earlier this year to examine how large financial institutions would handle a potential downturn in the economy.

Rep. Jeb Hensarling, the lone Republican member sitting on the COP, said he dissented on the August report, arguing that it employed assumptions that are excessively pessimistic. This was particularly so, he said, when it came to a model it employed examining the capitalization of smaller banks.

"As with any econometric model, input assumptions drive the output results and it is far from clear that future economic conditions will be 20% more negative than the 'more adverse' standard adopted by the Fed for the stress-tests," said Hensarling, R-Texas.

The panel took issue with a Public Private Investment Partnership program being rolled by the Treasury Department. The PPIP program is preparing to buy toxic mortgage securities from financial institutions, but the Treasury has delayed indefinitely a program to buy whole loans from financial institutions. COP's Warren said she knows of "no plans" at Treasury to employ the program to buy toxic whole loans.

Dissenting view

Hensarling added that he is worried that the report's effort to value toxic assets will "jumpstart" the price discovery process for the securities "without understanding the costly consequences."

Hensarling argued that the policy recommendations in the report are outside the scope of the panel's authority, contending that members should focus their endeavors in other areas

“…outside the scope of…”

Heck, he might as well just say that you can’t and don’t want to deal with any REAL problem. Instead we will have “stress-tests” and pressure and extort the FASB into allowing mark to fantasy accounting.

What a joke this episode has become. Congress has no power and can't even see what the Treasury and Fed are doing any better than I can follow the money (or lack thereof) behind the unemployment trust fund.

Here's reality. Politics and central bankers in the current version of America are nothing but a sad and sick joke.

Almost half of single-family mortgage holders owe more than houses are worth

Nearly half of the single-family mortgage holders in South Florida owe more than their houses are worth, a worrisome reminder of the region's 3 1/2-year housing slump.

In Palm Beach, Broward and Miami-Dade counties, 47 percent of the 837,177 single-family home mortgages are "underwater," according to a second-quarter report released today by Zillow.com, a real estate company that compiles data from public property records.

That's up from 44 percent in the first quarter of 2009. Zillow did not release a percentage for the second quarter of last year.

Nationwide, 23 percent of single-family homeowners with a mortgage had so-called negative equity during April, May and June. Many borrowers who owe more than the houses are worth put little or no money down and paid near-record prices in 2004, 2005 and 2006.

"As a homeowner, how do you deal with that?" said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter. "It can burn you up. For a lot of people, there's no way out any time soon."

How do you deal with it? I guess you just close your eyes and “hope.” Don’t worry, the central bankers will be right there to help.